Bottom fishers appeared on the Russian dollar denominated Russia Trading System (RTS) exchange on March 3 and bought utility stocks, pushing them back into the black in terms of returns YTD.

Russia’s stock market sold off heavily on February 28 dropping more than 250 points in a week and 60 points in the day as coronavirus pandemic fears suddenly swept global emerging market (EM) equity markets.

Russia’s utility stocks have been the star performer over the last six months as “electricity is the new oil,” VTB Capital (VTBC) said in its end of month wrap in February. The sector has come to the end of its investment cycle that started in 2007 and companies in the sector have low capex, and a strong and predictable cash flow thanks to a clear tariff regime that has made them an investors' darling.

However, as panic gripped the world’s markets Russian stocks got caught up in the sell-off. The RTS plunged to 1,300 at the close on March 2, down from over 1,600 in the middle of January, dragging utility stocks down with it. Utilities posted a negative return of -3% YTD as a result, down from a return of over 18% only two weeks previously. But by March 4 utilities were back in the black returning 4% YTD after heavy buying the day before. 

Thanks to investors’ enthusiasm for the story, utility stocks have proven to be the only sector on the Russian stock market that has been able to resist the nerves caused by the outbreak of the coronavirus this year and the only sector to consistently show a positive return throughout the year, apart from this week.

However, analysts say the recovery of the sector’s prices has more to do with bottom fishing and does not necessarily signal the beginning of a recovery in equity prices. Sberbank CIB was predicting an end of year 1,700 target for the RTS this year, but that was before the coronavirus outbreak happened.

Having said that, the International Monetary Fund (IMF) said in a note last week that it is expecting a V-shaped recovery for global economic growth if the infection rate starts to peter out relatively soon. According to Renaissance Capital, that has been tracking the virus, the Chinese infection rate has passed peak, but as the virus has only just appeared in Europe there are several months left to run in the rest of the world. On March 3 Ukraine and Belarus both reported their first confirmed cases (and Ukraine also reported a pet dog had been infected – a first in the current epidemic). The Baltic states also reported their first cases at the end of last week and Poland reported its first case on March 4. In Italy and Germany the virus is now well established and the number of reported infections is growing quickly.

Typically it takes three months for a flu virus to reach peak and a total of six months for the first wave of infections to pass, about the same time as it takes to develop a vaccine.

Analysts are being cautious, but notes are appearing about the medium term prospects for equity investments as if the virus follows the normal course of seasonal flu infections the sell-off in February could represent one of the best buying opportunities since 2008. Russian investment banks are writing that the utility sector remains a buy as in the medium term a pandemic does relatively little to dent the power sector’s investment case. Other analysts highlighted the Turkish banking sector as another potential buy as the Turkish economy remains relatively resilient and banking stocks there have sold off heavily making them increasingly “too cheap to ignore”.